Global stock markets had a rollercoaster 1H thanks to the pandemic and aggressive easing by central banks. Going into 2H, we examine liquidity and earnings outlook to see which direction the market will head to. We will also discuss potential impact from the U.S. presidential election. Our HSI target range for the 2H is 23,800-26,200 in our base case scenario.
- How much further can liquidity-driven rally go? Central banks' QE have helped stabilise stock markets during the pandemic. Now, the risk is the Fed may be taking a pause in QE, as its balance sheet shrank for the last wo weeks. We believe the Fed will offer some downside protection in stock market, but unlikely to give further impetus.
- Can earnings recover at record pace? The S&P 500’s and the HSI’s 2020E EPS have stabilised in recent weeks. Whether the worst is over in earnings downgrade remains to be seen, as the Q2 earnings season is coming. Consensus earnings will surpass pre-pandemic levels in 2021, which sounds very optimistic and will set a record pace of earnings recovery. The biggest risk to earnings remains the path of the COVID-19 pandemic.
- How the U.S. election will affect stock markets? This year’s presidential election is arguably more influential on markets than ever, given that President Trump started the U.S.-China trade war during his first term. Trump is lagging behind Joe Biden in presidential election polls. Stocks tended to underperform when incumbent party lost, but Biden is widely seen as less pro-market as he vowed to raise corporate tax.
- HSI target: 23,800-26,200 in base case. We expect the HSI to trade between 9.4x-12.1x forward P/E in the 2H, within the P/E range of the past decade, based on blended forward 12-month EPS. In our base case scenario, we expect the HSI to be range-bound in 23,800-26,200. Upside potential would be capped by numerous risks, such as new waves of COVID-19 outbreak and U.S.-China tension.
- Strategy: continue to prefer growth over value. In our base- or worst-case scenarios (moderate to serious rebound in COVID-19 new cases in some of major countries), we continue to favour sectors that are less vulnerable to recession and lockdown measures. We also suggest positioning for 5G-driven recovery in technology sector, while diversifying risks via gold ETF or miners.
